Why I Don't Agree with Dave Ramsey about Credit-Cards
My wife is more into Dave Ramsey than I am. However, I've recently been watching some of the clips on YouTube from his show, The Dave Ramsey Show. Sometimes, I definitely agree with him and his advice makes a lot of sense. Other times, I disagree. In this case, his advice to one caller makes sense, but I don't think that it's universal. The advice was regarding the use of Debit- and Credit-Cards.
The caller had described that he and his wife put everything on their credit card and pay off the balance each month, raking in the reward miles while not paying a cent of interest. Dave had a pretty simple reason why this was still a bad idea.
If you use a credit card for everything (or a debit card too), you'll likely spend more money as opposed to using cash. Technically, he's not wrong. There are numerous studies showing this. Dave even explained it pretty simply. He explained that when we were kids and we traded toys or trading cards, we handed something over and received something else. When we buy things with cash, we're handing over money and getting a good or service in return. However, unlike cash, when we pay for things using plastic, we hand over our card and then the cashier hands the card back. Then, we receive the good or the service. Psychologically, this makes complete sense, especially for people who have poor impulse control.
I still disagree with Dave that using plastic (IE, a credit-card or debit-card) is universally bad. Yes, for people who still over-spend when they go out, go ahead and try using cash. However, there are 3 reasons why I still use plastic for everything: Convenience, Cash Rewards, and Security.
This is the double-edged sword or credit- and debit-cards. The convenience makes it easy to spend responsibly as well as easy to spend irresponsibly. Personally, I prefer just carrying my credit-card as opposed to the cash I may need for a trip. Unrelated, I hate handling cash because it's unsanitary. I'm not a huge germaphobe but it is something I think about.
For us, Bank of America offers 5% & 10% cash back rewards for spending at certain retailers using our debit-card. If I know my wife and I are going to go to Moe's anyway, why not take advantage of that deal? I could understand the hole in the logic if we were spending $20 just to save $2, but if we were already going to go there anyway, there isn't anything wrong with saving money. For our credit-card, we have cash back rewards. 1% for everything, 2% on groceries, and 3% on gas. My wife and I put most of our expenses on our credit-card and pay off the total at the end of the month. This way, we never carry a balance, thus, never pay any interest, and end up making $30-$50 every month.
This one is more for credit-cards than debit-cards, but the two are treated very differently in cases of Fraud. Debit-cards are covered under the Electronic Funds Transfer Act, or ETFA, while credit-cards are covered under the Fair Credit Billing Act, or FCBA. This could be a whole post on it's own, but the simplified difference between the two is that, in an instance of fraud for credit-cards, the onus of responsibility is on the issuer (IE, Visa, MasterCard, etc.) to get their money back. Meanwhile, in the same instance for debit-cards, the onus of responsibility falls on you to get your money back. This can make a big difference for getting your card skimmed at the gas pump (which is why I always pay inside the fuel station) or for getting your info stolen (like what happened with Home Depot or Target) in a retailer hack.
In short, I think that using plastic CAN BE a bad idea for SOME people. If you find that using cash works better for you, then do that. I think that using credit-cards can be very useful if you use them to your advantage and not use them to spend money you don't have. That's when you're going to get yourself into trouble. However, these are just my thoughts. Dave Ramsey is a very successful personal finance guru and entrepreneur, so his advice carries just a bit more weight.
The caller had described that he and his wife put everything on their credit card and pay off the balance each month, raking in the reward miles while not paying a cent of interest. Dave had a pretty simple reason why this was still a bad idea.
If you use a credit card for everything (or a debit card too), you'll likely spend more money as opposed to using cash. Technically, he's not wrong. There are numerous studies showing this. Dave even explained it pretty simply. He explained that when we were kids and we traded toys or trading cards, we handed something over and received something else. When we buy things with cash, we're handing over money and getting a good or service in return. However, unlike cash, when we pay for things using plastic, we hand over our card and then the cashier hands the card back. Then, we receive the good or the service. Psychologically, this makes complete sense, especially for people who have poor impulse control.
I still disagree with Dave that using plastic (IE, a credit-card or debit-card) is universally bad. Yes, for people who still over-spend when they go out, go ahead and try using cash. However, there are 3 reasons why I still use plastic for everything: Convenience, Cash Rewards, and Security.
Convenience
This is the double-edged sword or credit- and debit-cards. The convenience makes it easy to spend responsibly as well as easy to spend irresponsibly. Personally, I prefer just carrying my credit-card as opposed to the cash I may need for a trip. Unrelated, I hate handling cash because it's unsanitary. I'm not a huge germaphobe but it is something I think about.
Cash Rewards
For us, Bank of America offers 5% & 10% cash back rewards for spending at certain retailers using our debit-card. If I know my wife and I are going to go to Moe's anyway, why not take advantage of that deal? I could understand the hole in the logic if we were spending $20 just to save $2, but if we were already going to go there anyway, there isn't anything wrong with saving money. For our credit-card, we have cash back rewards. 1% for everything, 2% on groceries, and 3% on gas. My wife and I put most of our expenses on our credit-card and pay off the total at the end of the month. This way, we never carry a balance, thus, never pay any interest, and end up making $30-$50 every month.
Security
This one is more for credit-cards than debit-cards, but the two are treated very differently in cases of Fraud. Debit-cards are covered under the Electronic Funds Transfer Act, or ETFA, while credit-cards are covered under the Fair Credit Billing Act, or FCBA. This could be a whole post on it's own, but the simplified difference between the two is that, in an instance of fraud for credit-cards, the onus of responsibility is on the issuer (IE, Visa, MasterCard, etc.) to get their money back. Meanwhile, in the same instance for debit-cards, the onus of responsibility falls on you to get your money back. This can make a big difference for getting your card skimmed at the gas pump (which is why I always pay inside the fuel station) or for getting your info stolen (like what happened with Home Depot or Target) in a retailer hack.
In short, I think that using plastic CAN BE a bad idea for SOME people. If you find that using cash works better for you, then do that. I think that using credit-cards can be very useful if you use them to your advantage and not use them to spend money you don't have. That's when you're going to get yourself into trouble. However, these are just my thoughts. Dave Ramsey is a very successful personal finance guru and entrepreneur, so his advice carries just a bit more weight.
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